rental losses and ltd company

rental losses and ltd company

Didn't find your answer?

My client has two business, a property rentail business which she runs as a sole trader, and a management consultant busienss which she runs through a limited company.

This year she made a large loss on her rental business and a large profit in her ltd company. Is there anything stopping her charging the ltd company a high rent (she runs it from home) and declaring it under shcedule A . This way she shows no rental loss, and her limited company profits have been reduced.

Is there anything I shoudl be aware of?

Many thanks
Sarah Kedgely

Replies (17)

Please login or register to join the discussion.

avatar
By User deleted
07th Nov 2006 13:41

I wouldn't do it for at least two reasons
By the way, schedule A has ceased to exist. Please now refer to Income Tax (Trading and Other Income ) Act 2005.

Regards

Thanks (0)
avatar
By User deleted
07th Nov 2006 14:22

Yes, according to ACCA lecture
An identical question was asked at a recent ACCA seminar on property letting. The lecturer saw no reason why rental charged to a Limited Company for use of home office etc should not be set against other residential letting losses.

Thanks (0)
avatar
By User deleted
07th Nov 2006 14:45

What are your two reasons?
Hi Andrew,

I was wondering what your two reasons were?

Thanks (0)
avatar
By AnonymousUser
07th Nov 2006 15:50

What do you mean by 'high rent'?
Although not caught by transfer-pricing rules, charging a rent in excess of market rates may provoke the taxman. It may be disallowed as not being incurred wholly and exclusively for the purposes of the company's trade (but remaining wholly taxable in the recipient's hands).

And, yes, whilst Sch A no longer exists for individuals, it is still convenient to refer to it as such when discussing various sources of income (I still refer to Sch E, being less of a mouthful than 'income from employment'!)

Thanks (0)
avatar
By User deleted
07th Nov 2006 16:52

Thank you David for explaining one of the reasons
Secondly, loss relief would be wasted by obtaining relief at 19% in the company when it could be matched against future rental income in order to obtain relief at 22% or 40%. ?

Thanks (0)
avatar
By User deleted
07th Nov 2006 17:14

Possible PPR issue as well?
If the company is paying a 'high' rent they would presumably expect space in the house that is exclusively for their use. You might therefore compromise the clients PPR relief on the main house, although I think it would be a secondary consideration to the issue of disallowance set out below.

Edward

Thanks (0)
avatar
By AnonymousUser
07th Nov 2006 18:06

Use of Home
I was under the impression that a Ltd Co Director charging their Ltd Co a rent for use of home as office was not allowed. (Don't ask me to quote chapter and verse, it's just something I remembered).

Normally this would be because the director would get Rent a Room relief and therefore effectively create a tax efficient expense for the company. I don't see why the same would not apply here.

Can anyone clarify?

Thanks (0)
avatar
By User deleted
08th Nov 2006 09:17

Still don't think there is a problem
If you draw up a simple agreement for the company to have non-exclusive use of the home office & other rooms then there is not a problem with CGT or PPR relief.

If the rent is reasonable, say £500 per month, then this can be offset against CT by the company. The director/home owner declares £6000 rental income less any relevant costs, eg heat & light,. This profit can be offset against the losses from other rented properties.

Many rental properties don't make much of a profit against which to offset carried forward losses it's often better to offset the losses now.

Thanks (0)
avatar
By User deleted
08th Nov 2006 17:39

What if
Wahat if a sole trader working fom home charged his business rent and used his mortgage interest payments to offset the tax charge on rent recieved.

Obviously use of residence would be removed from the accounts for the sole trader.

Thanks (0)
avatar
By AnonymousUser
08th Nov 2006 16:43

Charles...
Re your point 1 -

"(she runs it from home)" !

Thanks (0)
avatar
By User deleted
08th Nov 2006 18:36

Charging of full rent not possible
Charging of high/full rent in the tune of say £500 would not be reasonable as a consultant business is not likely to have used a room and probably some IT equipment. The rent can only be prorated against the % of the house used. I think the commonly used formula is to :

1 / number of rooms in the house (including kitchen etc) x market rent of say £500. This won't be much though and quite a bit of hassle to set this up also. The risk of charging unreasonable rent would be as stated by other commentors - it would be disallowed.

Also, if the company rent the entire house, then the director living in it will be subjected to BIK. Not nice !

I suppose asking the tenant to prepay several months rents so that it is received in this tax year and giving the tenant a discount may work :-)

Other shemes may include renting the house to conduct some sort of company party/promotions/brocher making which are wholely and exclusively for the purpose of the trade.

Thanks (0)
By petersaxton
08th Nov 2006 21:05

Reasonableness
The rent charged has to be reasonable for it to be an allowable expense for tax purposes.

Thanks (0)
avatar
By NeilW
09th Nov 2006 16:13

Reasonable
A company is a separate entity.

For me to get a service that involves

- parking the Ltd Company registered address.
- Access to Internet and phone line infrastructure
- Light and heat included

from my local innovation centre would cost me over £200 per month for a 'hot desk' whether I used it or not.

So given the comparative, why can't a client charge over £200 per month to the company for the use of the directors own home whether the company uses it or not?

NeilW

Thanks (0)
avatar
By AnonymousUser
09th Nov 2006 11:59

Replies
Leslie - I don't think a sole trader can chare himself/herself rent or any other costs.

Steven - I don't think the prepayment route would work, given that rental profits are computed on the same basis as trading income, ie you recognise only the income that realtes to the period in question

Thanks (0)
avatar
By stevec.cooperparry.com
09th Nov 2006 17:10

Can't see a problem
As long as the rent (for non-exclusive use so no PPR problem) is reasonable you should get a tax deduction in the company and be able to utilise some of your 'Sch A' losses.

Andrew - I would rather have 19% relief now than 22% relief in a few years' time.

If you document that the room(s) are available 24hrs a day at short notice I would have thought a reasonably high rent could be justified when comparing it to a similar third party provided office.

I broadly agree with Charles that rent-a-room relief is only available where the tenant is a person rather than a business. I would note that the legislation is silent on this point as it talks about residences (a business has to reside somewhere?) but expect a challenge from HMRC if you claim rent-a-room for a business tenant.

Steve
Coates Franklin Ltd

Thanks (0)
By petersaxton
09th Nov 2006 17:10

Not an allowable expense
If the company is not using the premises why would £200 a month be an allowable expense for tax purposes?

Thanks (0)
avatar
By User deleted
09th Nov 2006 17:40

BIK
Hi David - I suppose a rental invoice dated within this tax year will take care of accural. Also, I vaguely remember also that cash basis is still allowed for small BTL business.

I suppose unless you seal up the room and ban your hubby /wife /son'relative/friend from enjpying the room and relevant part of the house
in anyway, there will be BIK implication.

Finally, given the HMRC agressive attitude, such 'special arrangement' is lilkely to caught unwanted attention and I doubt that tax saving in this case can justify streees, time, a fees from HMRC intrusion.

Thanks (0)